08/14/2012 05:23 pm ET Updated Oct 14, 2012

Sub-Saharan Africa's Mobile Money Revolution

Africa is blazing a trail in financial access innovation.

I'm just back from a trip with the family to East Africa. While traveling, it was hard not to marvel at the ubiquity of the mobile phone. The young assistant receptionist, who invested her first earnings as a maid into a nine month English course to create new opportunities for herself, had one. The Masai herder on the side of the road in the Serengeti had one. Fellow passengers on the local ferry to Zanzibar all had one. The taxi driver in Dar-es-Salaam had two. To the embarrassment of my sons, the devices were often more modern than mine. Reception was good wherever we went.

Macro numbers confirm these impressions: According to the GSMA, Africa has been the continent with the fastest growing mobile market in the world with almost 20 percent annual growth over the past five years. Skipping the development of fixed lines, it is now the world's second largest mobile market by connections with a total of almost 650 million at year-end 2011 after Asia. Ninety-six percent of subscriptions are pre-paid, which shows it's a solution for low income citizens.

Leveraging this new infrastructure, Africa is trailblazing financial access innovation. As The Economist noted when analyzing the new World Bank/Gallup FinDex data, 15 out of 20 countries globally where more than 10 percent of adults say they used mobile money at some point last year are on the continent. Nowhere is this more striking than in Kenya where 73 percent of adults use mobile money due to the staggering scale of M-PESA, and nearly a quarter of the Kenyan population uses it every day.

Why is that? Essentially the pent-up demand for secure financial transactions is so big and existing legacy infrastructure so underdeveloped that trying to do something different is both an opportunity and an imperative. Only 24 percent of working-age adults in Sub-Saharan Africa have an account with a formal institution. Because of the low reach of the traditional banking system, policymakers have been more open to innovative solutions. The Central Bank of Kenya allowed M-PESA to launch mobile money before any type of regulation was in place. The Central Bank of the West African Economic and Monetary Union, the BCEAO, allowed non-banks to issue electronic money, something that few other central banks around the world permit.

Africa is poised to change the way we think about financial service infrastructure (beyond bricks and mortar bank branches) to include new ways of doing banking -- over new channels (including the mobile phone) and with new providers (mobile network operators among others).

Challenges to the further spread of mobile money remain. One challenge is to turn subscribers into regular users. CGAP has identified 120 different branchless banking implementations that have been launched since 2007. But only 11 of those have so far reached over 200,000 active users. My colleagues working in Africa report that many consumers value the convenience, low cost, or even status associated with cash. It will take time for trust to build and perceptions to change.

As new and more conventional financial infrastructure and providers combine to new financial eco-systems, a number of tricky regulatory and policy questions arise. For example: Where are the risks in such a system; who is best positioned to bear and manage these risks; and how should they be regulated and supervised? Or: Which parts of the ecosystem are natural monopolies characterized by networks effects and positive externalities and therefore might need to be regulated from a competition policy perspective?

There are no easy, obvious answers. We will need to learn as these eco-systems evolve. From a financial inclusion perspective, however, the promise of such new eco-systems is big. In countries where mobile money is starting to reach large numbers of people (Kenya, Tanzania, Uganda in Africa, or Pakistan in South Asia), they provide a whole new way of reaching the unbanked. Innovations in financial products and services -- such as Jipange KuSave, M-Kopa, Kilimo Salama, products built on the M-PESA infrastructure -- are emerging, based on next-generation business models that required a relatively low-cost, ubiquitous infrastructure to make them viable from a business perspective. In the mobile money revolution, Africa is leading the world.

Tilman Ehrbeck is the CEO of CGAP. He blogs at